Huron Consulting Group Inc. — Q3 2020 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Huron is a global consulting and technology services company operating through Healthcare, Business Advisory, and Education segments. Results were materially affected by the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $205.3 million | $219.3 million | $645.8 million | $644.5 million |
| Operating income (loss) | $13.7 million | $20.6 million | $(16.2) million | $45.2 million |
| Operating margin | 6.7% | 9.4% | (2.5)% | 7.0% |
| Net income (loss) | $11.1 million | $13.7 million | $(17.7) million | $27.4 million |
| Diluted EPS | $0.50 | $0.61 | $(0.81) | $1.22 |
| Adjusted EBITDA | $23.6 million | $28.8 million | $70.1 million | $76.0 million |
| Adjusted EBITDA margin | 11.5% | 13.1% | 10.8% | 11.8% |
Cash flow from operations was $78.0 million for the first nine months, compared with $51.7 million in the prior-year period. Capital expenditures and capitalized software costs were $12.6 million, and total investing cash outflow was $28.4 million. Cash and cash equivalents increased to $74.7 million from $11.6 million at December 31, 2019.
Total debt was $251.5 million at September 30, 2020, including $248.0 million drawn under the senior secured revolving credit facility and $3.5 million under a promissory note. The company had $350.3 million of unused revolving capacity and $1.7 million of outstanding letters of credit. The credit facility matures in September 2024. Huron reported compliance with its covenants, including a 2.09x consolidated leverage ratio versus a 3.75x maximum and a 13.19x interest coverage ratio versus a 3.50x minimum.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 6.4%, while nine-month revenue was broadly flat, increasing 0.2%.
- Q3 utilization declined to 70.4% from 76.3%; average full-time billable consultants increased to 2,592 from 2,476.
- Q3 direct costs increased to 70.9% of revenue from 65.2%, primarily because of higher professional salaries and lower revenue volume.
- Q3 selling, general and administrative expense declined 19.9% to $38.6 million, reflecting lower travel, marketing, training, facilities, and meeting costs.
- Healthcare revenue declined 12.6% in Q3 and its margin fell to 29.3% from 32.9%. Education revenue declined 8.7% and its margin fell to 24.2% from 25.4%.
- Business Advisory revenue increased 5.6%, supported by cloud technology, analytics, restructuring, and capital advisory demand, but its margin declined to 16.3% from 19.1%.
- First-nine-month operating results included a $59.8 million non-cash goodwill impairment charge related to the Strategy and Innovation and Life Sciences reporting units. The charge reduced Life Sciences goodwill to zero and Strategy and Innovation goodwill to approximately $37.5 million.
- Interest expense declined because the convertible notes matured in October 2019, partially offset by higher revolving-credit borrowings.
- Huron repurchased and retired 313,998 shares for $20.9 million in Q1 2020. The share repurchase authorization expired October 31, 2020, with less than $0.1 million remaining at September 30.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide a clear quantitative full-year revenue or earnings forecast in the filing. Management expected COVID-19 to continue adversely affecting fourth-quarter results, particularly because of delayed projects and elongated sales cycles in Healthcare and Education. Demand increased for Business Advisory cloud-based technology, analytics, restructuring, and capital advisory services.
- On October 29, 2020, Huron announced a restructuring plan expected to generate initial charges of approximately $15.5 million to $19.5 million, including $3.5 million to $4.5 million of employee severance and $12.0 million to $15.0 million of primarily non-cash office-space and fixed-asset charges.
- The plan affects approximately 145 employees and is expected to generate annualized savings of approximately $23.0 million to $27.0 million. Future cash expenditures related to exited office space may continue through 2029.
- Huron agreed to acquire ForceIQ, a Salesforce Industries partner, with closing effective November 1, 2020. The acquisition was not expected to be significant to the financial statements.
- Huron announced its intent to divest its U.K.-based life sciences drug-safety practice, which generated $1.9 million of revenue during the first nine months of 2020.
- The company deferred the employer portion of Social Security taxes under the CARES Act, with repayment expected in equal installments in the fourth quarters of 2021 and 2022.
- Goodwill and other intangible assets represented approximately 56% of total assets at September 30, 2020. Further performance deterioration could result in additional impairment charges.
- Huron held a $61.1 million fair-value investment in Shorelight convertible debt, valued using significant Level 3 assumptions, and a $5.0 million preferred-stock investment in Medically Home without a readily determinable fair value.
- The company identified an immaterial revenue-recognition error from earlier 2020 quarters and corrected it in Q3 through a $0.8 million revenue reduction and a $0.6 million reduction to Q3 net income.
- Management reported no litigation or legal proceeding expected to have a material adverse effect, but acknowledged the inherent uncertainty of legal matters.
Important Facts for Investors to Verify
- Whether COVID-19-related project delays and lower utilization persist beyond Q4 2020, especially in Healthcare and Education.
- The realized savings, cash costs, lease obligations, and execution timing of the fourth-quarter restructuring plan.
- Whether additional goodwill or intangible-asset impairments become necessary if demand or forecasts deteriorate.
- Debt reduction, cash generation, covenant compliance, and available revolver capacity after the restructuring and ForceIQ acquisition.
- The valuation and liquidity risks associated with the $61.1 million Shorelight convertible debt investment and other private-company investments.
- The timing and financial effect of the life sciences drug-safety divestiture.
- The effect of deferred payroll taxes, office-lease commitments, and other restructuring-related obligations on future cash flow.